Subscribe To

Monday, 18 July 2011

Southern Europe: Beyond a Demographic Point of No Return

This came swam into my ken just now. The author David P. Goldman was global head of debt research for Banc of America Securities and earlier global head of credit strategy at Credit Suisse. He is a columnist (under the byline "Spengler") for Asia Times Online.

There’s plenty of fat to cut from Southern European government budgets. The fiscal crisis of the PIIGS will leave the peoples of those countries poorer and unhappier on a permanent basis, and the political parties who must impoverish their constituents require time to posture before getting down to the grim business at hand. The old expedient of devaluation was easier, because it effectively imposed a wealth tax on the entire country across the board (by reducing the real value of everyone’s savings) without the need for detailed negotiations. The absence of the devaluation option within the Euro mechanism requires a great deal more theater on the part of feckless and incompetent politicians who made their careers by dispensing borrowed money to their voters.

That is true for the moment, when the elder dependent ratio for Southern Europe stands at around 25%. Between 2020 and 2045, however, the infertility of Southern Europe will catch up with it, and the elder dependent ratio will rise to over 60%–an impossible, unmanageable number. At that point the character of these countries will change radically; they will be overwhelmed with immigrants from North Africa as well as sub-Saharan Africa, who will not have the skills or the habits of civil society to maintain economic life. And their economies will slide into a degree of ruin comparable only to that of classical antiquity. Perhaps the Chinese will operate Greece as a theme park. Spain, which can draw on Latin American immigrants, is likely to be the least badly off.

Strictly speaking, Ireland should not be included among the PIIGS (Portugal, Italy, Ireland, Greece, Spain). Although post-Catholic Ireland has lost its famous fecundity, Ireland’s fertility rate still hovers around replacement. The Irish economy was far too dependent on offshore finance as a source of employment and suffered disproportionately from the collapse of the credit bubble in 2008. But this small country also has high-tech manufacturing and other industries, which make the eventual restoration of prosperity possible. The southern Europeans are doomed. They have passed a demographic point of no return. There simply aren’t enough females entering their child-bearing years in those countries to reverse the rapid aging.

Why would anyone buy a 30-year bond from any of these countries? By 2041, there won’t be enough taxpayers left to pay the coupons. And that raises a related question: what is time horizon of an equity investment in those countries? Although Standard and Poor's calculates the duration of equities at somewhere between 20 and 30 years, that is a somewhat dubious estimation of interest sensitivity, not a measure of the horizon of expectations. Markets are notoriously short-sighted. But at some point markets must recognize that companies that have a rapidly-shrinking pool of workers as well as customers are in no position to earn profits. The real demographic crunch will start to hit in the mid-2020s, and it is possible that markets will ignore the inevitable demographic doom until then.

There’s little reason to expect European contagion to blow up the financial system today. But there’s also no reason to invest in those countries, except on a very opportunistic